An Empirical Analysis of Illegal Insider Trading

ABSTRACT

Whether insider trading affects stock prices is central to both the current debate over whether insider trading is harmful
or pervasive, and to the broader public policy issue of how best to regulate securities markets. Using previously unexplored
data on illegal insider trading from the Securities and Exchange Commission, this paper finds that the stock market detects
the possibility of informed trading and impounds this information into the stock price. Specifically, the abnormal return
on an insider trading day averages 3%, and almost half of the pre‐announcement stock price run‐up observed before takeovers
occurs on insider trading days. Both the amount traded by the insider and additional trade‐specific characteristics lead to
the market's recognition of the informed trading.